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Monday, 18 December 2017

A haircut isn't what it used to be, ... on Greece... tonight

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Anthony Peters, SwissInvest Strategist

When Paul Getty famously said that a billion dollars isn’t what it used to be, he meant it. Now we are in a world where the same can be said about a trillion, albeit it more likely to be defined in euros than in dollars. As the 8pm deadline approaches for the PSI to be accepted by Greek private sector creditors, there is an increased feeling of unreality.

Even the most experienced players have thrown in the towel when it comes to trying to understand what lies ahead and they will either sit absolutely glued to their screens today or they will decide that it is entirely beyond their control and they will naff off for a long lunch.

The most excellent In Touch Capital put out a small “What if” note overnight, penned by their own Andreas Koutras, which tried to answer some of the questions as to what might follow if the PSI were to fail. It already seems as though nobody can clearly agree on what “75% participation” even means.

Do 75% of bondholders have to participate or do 75% of bondholders have to approve? Is it 75% of 75% and therefore 62-1/2% which is needed?

On such uncertainties alone, it is impossible to set a sensible scenario to trade from. Having thought about plundering and paraphrasing Koutras’ piece and having concluded that I can’t make a good thing better, I have decided to take the lazy option and to pass on his thoughts verbatim:

“What if the PSI fails?”                                                                        

For whatever reason, percentage or legal, the PSI is rejected. What is the sequence of events that might follow.

1.  Let’s start by apportioning blame. If the PSI fails it would be not because of the Greeks. All the Greek banks and the majority of the pension funds have signalled their willingness to tender. If the PSI fails it would be humble pie for Germany not for Greece. Germany is the major driver of this policy. Germany is responsible for pushing this bad solution to Greece even though they conceded that it was bad in October 2011. So if the market fails, the PSI it would be calling Germany’s bluff in a big way. It would not be punishment to Greece.

2.  Mario Draghi is going to come out probably with another trillion of a 10-year LTRO and would reduce the regulatory reserve to 0%. It would further alter the collateral rules and accept with no haircut anything that resembles a promise to pay even from Bernard Madoff. Yet another pie for Bundesbank.

3.  To that extent, the PSI failure would be a bullish sign rather than a bearish one.

4.  Gold might go up momentarily as the new printing machine is oiled up.

5.  Most policy makers are promoting the idea that they would let Greece default. This time though it would not just be a restructuring event but a Failure to Pay; this is a far more serious offence than restructuring.

6.  It is odd to see point (4) being talked by Greek politicians. I thought they were there to save the country not to drive it into suicide. So my guess is that they would try to secure another deal by giving earth and water (is an ancient Greek saying that means total unconditional surrender, γῆ καί ὕδωρ) to Troika.

7.  Would the EU and especially France and Germany allow Failure to Pay inside Europe with elections round the corner? If not, they need to come up with another plan by May 18 when the next €8bn mature.

8.  In this case they could divert some of the €30bn that are destined for the PSI to pay the March bond. After all, €4.6bn is owned by the ECB. Failure to Pay also means failure to pay the ECB.

9.  They might even come up with a better plan for Greece and Europe. They might include the official sector in the haircut which seems to have amnesty. Or even better they might sit down and get a REAL solution for Europe. A proper fiscal union, not the Mickey Mouse one that lacks democratic accountability and takes Europe back to the dark days.

10.  It is actually better to move it further as elections are to be held in early May in Greece and Europe must know whether Greeks would be able to implement the reforms or join the long list of failed states.

So, the threat of disorderly default does not seem to hold much weight. It is for this reason that investors are sceptical about tendering their bonds. Tendering 100 to get back 20 versus a default and recovery of about 20 is not a real threat. It is an incentive to hold out. Happy results.

The suspended reality with which we are all trying to come to grips with is the way in which key laws of lending, the axioms of finance, are being steamrolled by the competent authorities which are attempting to achieve a result which doesn’t actually exist.

Having tried to create a single currency zone without fiscal union and having failed, those responsible are now trying to rewrite the laws of default in the same way and in so doing are risking creating in the same way an unsustainable edifice. Although I am happy to note that analysts who have used the term “kicking the can down the road” so often are now desisting from repeating that particular platitude but it is hard to find a more fitting simile – or at least one which everyone recognises at first sight. Building a bigger cesspit does not make it any better a cesspit than the smaller one which preceded.

Many, if not most, bondholders accept tacitly that even exchange bonds will in due course be subject to further haircuts which is why bonds issued under English law are now being treated as a different class of asset from those issued under Greek law – a second haircut would in all probability not cut the mustard on the non-Greek documented paper.

The threat by the Athens authorities that there is only enough cash to satisfy the holders of tendered bonds and that bondholders who do not tender can expect nothing is utterly beyond the pale. We would have creditors who lose nothing – the ECB; we would have creditors who get next to nothing – those who tender; and we have creditors who get nothing at all – those who do not voluntarily tender.

I am feeling very uncomfortable and I fear that whatever the outcome of the PFI tender is this evening, it will not be an affirming and life-enhancing experience

I must be dreaming. I have not spent 30 years in finance under evermore stringent compliance rules which have been imposed at an alarming rate in order to create a fair and level playing field for all just in order to see those who have created and imposed those rules to decide that such level playing fields are not for them and that rule books are for burning.

The great libertarian, Heinrich Heine, wrote in the early 19th century that where books are burnt, soon they will be burning people. Modern democracy, not ancient Athenian democracy, is partially defined by the idea that the end cannot simply be used as an excuse to justify the means. I am feeling very uncomfortable and I fear that whatever the outcome of the PFI tender is this evening, it will not be an affirming and life-enhancing experience.

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